TTK Prestige - Online Share Trading India - Motilal Oswal Prestige Initiating Coverage | 18 March 2015 ... commands a ~37% market share in pressure cooker category, ... for Hawkins

Rules India's kitchen

TTK Prestige

Initiating Coverage | 18 March 2015Sector: Consumer

Atul Mehra ([email protected]);+91 22 3982 5417

Niket Shah ([email protected]); +91 22 3982 5426

Rules India's kitchen

TTK Prestige

18 March 2015 2

TTK PRESTIGE: Rules India’s kitchen

Summary .................................................................................................................................... 3

Story in charts: Rules India’s kitchen ......................................................................................... 5

Prestige is India’s largest kitchenware brand ........................................................................... 6

Significantly outperformed competitors ................................................................................. 16

Capacity in place for next growth phase ................................................................................. 18

E-commerce impact / induction de-growth behind ................................................................ 20

Earnings to post 41% CAGR over FY15-17 ............................................................................... 21

Initiating coverage with a Buy rating ...................................................................................... 24

Management ............................................................................................................................ 26

Industry overview .................................................................................................................... 27

Company overview .................................................................................................................. 30

Financials and valuations ......................................................................................................... 33

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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TTK Prestige

18 March 2015 3

Rules India’s kitchen Set for growth revival

n Prestige is India’s brand leader in the kitchenware and appliances categories and commands a ~37% market share in pressure cooker category, 31% market share in the cookware category and ~10% market share in the appliances category.

n Having expanded fixed assets by 8x over last 5 years, TTKPT has ample room to improve capacity utilization (58% in pressure cookers and 42% in nonstick cookware). Substitution of imports with own manufacturing, revival of domestic demand as well as export strategy to drive utilization rate higher.

n With an aim to overcome predatory pricing by e-commerce players and avoid channel conflicts, TTKPT plans to directly tie up with e-commerce players to maintain price discipline. This will ensure traditional channels are not impacted.

n We believe the de-growth phase is behind for the company, and with discretionary spends revival as well as ramp-up of export opportunity, TTK will post a robust 23% revenue CAGR over FY15-17.

n We expect higher capacity utilization to drive significant operating leverage for TTKPT with margins expanding 240bp over FY15-17, driving 41% PAT CAGR.

n The stock trades at 30.8x and 21.7x FY16/17 EPS. We initiate coverage with a Buy rating valuing the stock at 30x FY17 EPS, with PT of INR5,000.

Prestige is India’s number-1 kitchenware brand Prestige is the brand leader for kitchenware and appliances categories in India. TTKPT commands ~37% market share in pressure cooker category, 31% market share in the cookware category and ~10% market share in the appliances category, with an overall market share of 14% in the INR90b Indian kitchenware market. Strong advertisement spends of 7% of sales as against just 3-4% of sales for Hawkins and continuous product portfolio expansion (from just pressure cookers to complete range of kitchen products), geographic expansion into Non-South markets which now constitute 45% of sales have made Prestige the brand leader. This has ensured that once similarly sized, TTKPT has now grown to be 3x the size of Hawkins, reflecting continuous market share gains. We believe, with the right investments in brand and product extensions, TTKPT is best placed to capture the strong growth potential of the Indian kitchenware market.

Product portfolio expansion helps emerge as the leader in kitchenware TTKPT has transformed itself from a mere outer-lid pressure cooker manufacturer to a complete kitchen solution provider. In line with its vision of ‘a Prestige in every kitchen’, it has entered several new product categories – nonstick cookware, kitchen electrical appliances and gas stoves. This has enabled TTKPT to expand its addressable opportunity from just INR13b to INR90b and reduce the share of pressure cookers in its overall sales from 59% in FY06 to 37% in FY14. Also, its wide product portfolio has enabled TTKPT to distinguish itself from its key competitor, Hawkins, which continues to be focused on just the pressure cooker and cookware categories.

Initiating Coverage | Sector: Consumer

TTK Prestige CMP: INR3,637 TP: INR5,000 (+37%) Buy

BSE Sensex S&P CNX

28,622 8,686

Stock Info

Bloomberg TTKPT IN

Equity Shares (m) 11.7

M.Cap. (INR b)/(USD b) 42.6/0.7

52-Week Range (INR) 4,830/2,700

1, 6, 12 Rel. Per (%) 9/-23/1

Avg Val (INRm)/Vol‘000 82/23

Free float (%) 29.6

Financial Snapshot (INR b)

Y/E March 2015E 2016E 2017E

Sales 13.7 16.9 20.9

EBITDA 1.6 2.1 2.9

NP 1.0 1.4 2.0

EPS (INR) 84.1 118.1 167.5

EPS Gr. (%) -8.1 40.5 41.8

BV/Sh. INR 562.9 648.2 768.9

RoE (%) 15.8 19.5 23.6

RoCE (%) 23.2 28.7 34.3

P/E (x) 43.3 30.8 21.7

P/BV (x) 36.2 26.6 19.4

Shareholding Pattern (%)

As on Dec-14 Sep-14 Dec-13

Promoter 70.4 70.4 70.0

DII 4.5 3.1 1.4

FII 18.2 20.3 22.1 Others 7.0 6.2 6.4

Notes: FII incl. depository receipts

Stock Performance (1-year)

TTK Prestige

18 March 2015 4

Massive capacity expansion; sets right stage for growth TTKPT has expanded its capacities across segments. It has incurred a capex of INR3b over FY11-14, multiplying its net block by 8x from INR419m to INR3,396m. Pressure cooker capacity was increased by 2x from 4.8m pieces to 9.6m pieces, while nonstick cookware capacity was increased by 6x from 2m units to 12m units. With expansion and consequent higher utilization, revenue from own manufacturing improved from 48% in FY13 to 57% in FY14. However, there still remains ample room to improve capacity utilization (58% in pressure cookers and 42% in nonstick cookware). TTKPT’s new Gujarat unit which has a capacity to produce 7m pieces of non-stick cookware is currently utilizing capacities to the extent of ~40%. The management plans to raise utilization by substitution of outsourcing with own manufacturing for domestic business and initiatives towards developing a strong export business. Our interaction with management suggests that TTKPT is at an advanced stage of negotiation with foreign OEMs and has been working on trial orders for them. Thus, we expect export segment to meaningfully contribute from FY16. Improvement in capacity utilization to drive margins higher As the capacities are currently underutilized (58% capacity utilization in pressure cookers and 42% in nonstick cookware) there are significant under-absorbed fixed costs, dragging margins lower for these segments. As capacity utilization improves, we expect margins to expand 240bp over FY15-17 from 11.6% to 14% led by operating leverage. Further, with focus to ramp up value added segments like Hard Ionized and Stainless Steel category of pressure cookers (25% of total pressure cookers) and non-stick cookware (15% of total non-stick cookware), we expect realization per cooker / cookware as well as margins in these categories to improve going forward. Plans direct tie-ups with e-commerce companies In our interactions, the management has indicated that a number of e-commerce firms have approached TTKPT for direct tie-ups to sell its products on their platforms. TTKPT intends to manage its own page on e-commerce platforms and ensure no predatory pricing. It is likely to take another six months to one year to make complete transition to this new arrangement with e-commerce firms, post which it can avoid channel conflicts faced in the past. Valuation and view We expect revenue to grow at a CAGR of 23% over FY15-17, led by 31% CAGR in nonstick cookware business, 23% CAGR in pressure cooker business, and 17% CAGR in appliances business. With operating leverage, we expect EBITDA to post 35% CAGR and PAT to post 41% CAGR over FY15-17. Led by better asset utilization, we expect return ratios to improve (RoCE to improve from 23% to 34% and RoE to improve from 22% to 24%). Given minimal reinvestment needs, annual free cash flow should improve to INR1.7b over FY15-17. The stock trades at 30.8x FY16E and 21.7x FY17E EPS. We initiate coverage with a Buy rating with a target price of INR5,000 valuing the stock at 30x FY17E EPS of INR167.5.

TTK Prestige

18 March 2015 5

Story in charts: Rules India’s kitchen

Exhibit 1: Significant portfolio expansion

Source: MOSL, Company

Exhibit 2: Expanded opportunity size from INR13b to INR90b


Exhibit 3: Strong marketing investments


Exhibit 4: Significant capacity expansion


Exhibit 5: Robust cash generation


Exhibit 6: Strong return ratios


59 56 55 53 47 41 36 37 37 38 38 38

15 15 16 15 17 20 20 18 17 19 21 22

10 11 10 10 12 10 10 9 13 13 12 12

9 13 14 17 20 25 31 33 30 26 26 26

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Pressure Cookers & Pans NonStick CookwareGas Stoves Kitchen Electrical Appliances

Pressure cookers, 13

Non stick cookware,

7

Mixer grinders, 20

LPG gas Stoves, 18

Induction Cook

tops, 10

Rice Cookers, 4

Chimneys, 6

Wet Grinders, 5

Small Appliances,

7

Market size (INR b)

1.6%

2.6%3.5%

4.2%

6.2%

Bajaj Electricals

Havells Hawkins V-Guard TTK Prestige

Ad spend to revenues (%)

419

1,507 1,681

3,396 3,455 3,489 3,501

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Net Fixed Assets (INR m)

-911

49 145

9991,192

1,686

FY12 FY13 FY14 FY15E FY16E FY17E

Free Cash Flow (INR m)59

47

2723

2934


RoCE (%)

TTK Prestige

18 March 2015 6

Prestige is India’s largest kitchenware brand Key drivers: Advertising investments, portfolio expansion, distribution

n Prestige is India’s best known brand for kitchenware and appliances. TTKPT commands 14% share of India’s INR90b kitchenware industry. It spends 7% of its sales on advertising, much higher than a peer like Hawkins which spends 3-4% of its sales.

n With product portfolio expansions, TTKPT has expanded its addressable opportunity from INR13b to INR90b and reduced the share of pressure cookers from 59% of its sales in FY06 to 37% in FY14.

n It has expanded its distribution network to penetrate the western, northern and eastern regions, and now derives 45% of its revenue from these markets.

Brand leader – number-1 in kitchenware Prestige is India’s number-1 kitchenware brand Prestige is India’s brand leader for kitchenware and appliances. It commands 14% share in the INR90b kitchenware industry. Innovative marketing, continuous investments in advertising, and expansion of product portfolio from just pressure cookers to complete range of kitchen products have ensured continuous market share gains for Prestige. Along with brand promotion, product exchange schemes have enhanced its brand loyalty. To project itself as a pan-India kitchenware player, in FY14, TTKPT appointed Bollywood celebrity couple Abhishek Bachchan and Aishwaria Rai Bachchan as its brand ambassadors. We believe, with the right investments in brand and product extensions, TTKPT is best placed to capture the strong growth potential of the highly fragmented Indian kitchenware market. Exhibit 7: Bollywood celebrity couple Abhishek Bachchan and Aishwaria Rai Bachchan are Prestige’s brand ambassadors

Source: Company, MOSL

#1

TTK Prestige

18 March 2015 7

Highest advertisement spends amongst peers drives brand leadership TTKPT has been continuously investing in brand building with the aim to enter new markets and widen its product portfolio. Its advertisement spends average around 7% of sales. In contrast, Hawkins spends just 3-4% and Bajaj Electricals spends 1.3-1.5%. Higher advertising spends over the years have helped TTKPT enter non-South markets and to penetrate into newer product categories. Newly launched products have received good market response despite tough competition from existing players in those products. We believe TTKPT is on the right track to develop a premium brand image and become the first choice for consumers looking for better quality kitchenware. TTKPT continued its brand and marketing investments despite slowdown in sales over last two years, which we believe should help TTKPT in outperforming industry growth as discretionary spending revives. Exhibit 8: TTKPT has the highest advertisement spends amongst peers


Exhibit 9: TTKPT has been continuously investing in advertising and brand building


1.6%

2.6%3.5%

4.2%

6.2%

Bajaj Electricals Havells Hawkins V-Guard TTK Prestige

Ad spend to revenues (%)

224 241 329 354528

714794 804

885 1,106 1,383

8.0%7.4%

8.2%7.0% 6.9% 6.5%

5.8% 6.2% 6.4% 6.6% 6.6%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Advertising spend (INR m) Advertising spend (%)

TTK Prestige

18 March 2015 8

Fragmented category structure benefits industry leader The kitchenware category (pressure cookers, cookware, stoves and small kitchen electrical appliances) in India is highly fragmented, not only in terms of number of manufacturers, but also in terms of product range. Unorganized players command a significant portion of the category – about 50% of the pressure cooker and 60% of the nonstick cookware segment is unorganized. Also, penetration levels are still low – about 40% for pressure cookers, with rural penetration at 25%. TTKPT with its strong Prestige brand would be a key beneficiary of the strong growth in kitchenware. Its dominating position in various segments of kitchenware, wide array of products across kitchen services, extensive distribution network, and continuous new product launches should help drive strong growth for the company. Exhibit 10: TTKPT commands strong market shares across kitchenware categories

Categories Market size

(INR b) Organized

proportion (%)

TTKPT's revenue (INR b)

TTKPT's market share

TTKPT's revenue

proportion

Pressure cookers 13.2 50% 4.9 37% 38%

Non-stick cookware 7.2 40% 2.3 31% 17%

Gas stoves 18.0 50% 1.7 9% 13%

Kitchen electrical appliances

51.6 50% 3.9 8% 33%


Kitchenware industry moving from ‘being functional’ to ‘being fashionable’ Psychographic changes are making way for national brands like Prestige. With rising affluence and aspiration levels, consumers are willing to pay a premium for branded kitchenware, which offers assurance of quality and a reliable service network. Also, kitchens are rapidly changing from being functional to being fashionable. Consumers are increasingly spending time and resources to build convenient, organized and fashionable kitchens. Growing usage of modular kitchens points to consumers’ increasing interest in making kitchens lifestyle statements. While most of the demand is from upper middle class urban households, middle class families (even in tier-II/III cities) are also adding to demand. Consumers are spending not just on furniture and modular kitchens, but also on branded kitchenware. All these changes augur well for TTKPT’s growth prospects. Favorable demographics support strong growth for branded kitchenware Various changes in demographics like (1) shift from joint to nuclear families (average household size has declined from 5.5 in 1991 to 4.9 in 2011), (2) rapid urbanization (increased from 28.2% in 2001 to 31.2% in 2011, but still much below the world average), and (3) rise in working couples (female participation in organized sector has risen from 17.8% in 2001 to 19.9% in 2009) are increasing the number of households, and more importantly, creating a need for convenience. A decline in available cooking time has increased demand for efficient (like pressure cookers and other kitchen electrical appliances), innovative (like microwave pressure cookers) and quality (like nonstick cookware) kitchenware.

TTK Prestige

18 March 2015 9

Largest product portfolio and highest number of innovations

Has expanded product portfolio to emerge as Kitchen King TTKPT has transformed itself from a mere outer-lid pressure cooker manufacturer to a complete kitchen solution provider. In line with its vision of ‘a Prestige in every kitchen’, it has entered several new product categories like nonstick cookware, kitchen electrical appliances and gas stoves. This has enabled TTKPT to expand its addressable opportunity from just INR13b to INR90b and reduce the share of pressure cookers in its overall sales from 59% in FY06 to 37% in FY14. Its wide portfolio has enabled TTKPT to distinguish itself from its key competitor, Hawkins, which continues to focus on just pressure cookers and cookware.

Exhibit 11: Expanded from fewer than 100 SKUs till 2001…


Exhibit 12: …to several hundred SKUs currently


Exhibit 13: With only pressure cookers, TTKPT’s market size would have been limited to just INR13b…


Exhibit 14: With multiple product categories, TTKPT has expanded its market size to INR90b


Focus is on driving higher sales of value added cookers and cookware TTKPT is focusing on value added Hard Ionized and Stainless Steel category of pressure cookers and non-stick cookware as against traditional aluminum pressure cookers and cookware. These value added products command ~30% higher pricing as compared to traditional products along with 100-200bp higher margins. Our interaction with management suggests, value added products currently form 25% of pressure cooker sales and 15% of non-stick cookware sales. With focus to ramp up value added segments, we expect realization per cooker / cookware as well as margins in these categories to improve going forward.

Market size (INR b), 13

TTK's market share, 5

Market size (INR b), 90

TTK's market

share, 12.6

#2

TTK Prestige

18 March 2015 10

Exhibit 15: TTKPT has expanded its product portfolio significantly over the years


Exhibit 16: TTKPT’s product range for complete kitchen solutions

Preparation before cooking

Food preparation Kitchen supplements Kitchen hardware

Chopping Pressure cooking Heaters Chimneys

Blending Cooking Toasters Storeware

Grinding Sautéing, frying, etc Beverage makers

Processing Baking

Products Products Products Products

Mixer grinders Pressure cookers Kettles Complete kitchen solutions

Food processors Nonstick cookware Pop-up toasters

Choppers LPG gas stoves Sandwich toasters

Blenders Induction cook tops Coffee makers

Juicers LPG hobs Tea makers

Wet grinders OTGs

Knives Microwave ovens

Rice cookers

Barbecues


Exhibit 17: Wide product portfolio


59 56 55 53 47 41 36 37 37 38 38 38

15 15 16 15 17 20 20 18 17 19 21 22

10 11 10 10 12 10 10 9 13 13 12 12

9 13 14 17 20 25 31 33 30 26 26 26

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Pressure Cookers & Pans NonStick Cookware Gas Stoves Kitchen Electrical Appliances

TTK Prestige

18 March 2015 11

Highest product launches – First tapping inner-lid pressure cooker market… TTKPT has been a pioneer in launching new products as well as product variants such as microwave pressure cookers, induction cooktops, induction cookers/cookware and the Apple range of inner-lid pressure cookers. Firstly, TTKPT entered the inner-lid pressure cooker segment to penetrate the northern and north-eastern markets (where inner-lid is prominent as against outer-lid which is prominent in South India) through the launch of Prestige Nakshatra range of inner-lid pressure cookers in the regular and ‘handi’ varieties.

Followed by launch of appliances & pressure cookers with better aesthetics It further widened its offering through the Prestige Apple range of small inner-lid pressure cookers with three-liter capacity in vibrant colors, targeting younger urban families to meet the requirements of their modern kitchens and also for aesthetic appeal. It upgraded its Prestige Omega range of cookware products and introduced new products in the kitchen electrical appliances category.

Emerged as the leader in Induction cook top and cookware Similarly, the introduction of induction cooktop was well timed, as consumers looked for a credible alternative to gas cylinders, as the government capped subsidized cylinders. Additionally, to improve the usability of the traditional cookers and cookware on induction cooktop as well, it introduced the highest range of induction based cooker and cookware products in the market at a minimal premium of 4-5% over traditional products. This was at a time when competitors like Hawkins ignored this category. Even today, TTKPT has 4x the range of Hawkins in induction cookware clearing indicating TTKPT’s strong leadership in this segment.

Focus on innovative products and superior design has helped TTKPT to continuously gain market share from its peers. TTKPT introduces 70-100 new SKUs across product categories every year, which help it to stay ahead of competition. Exhibit 18: Track record of consistent innovations across product categories

Year New products introduced annually

FY04 50 new product variants; hard anodized, stainless steel pressure cookers

FY05 Omega select range of non-stick cookware

FY06 Non-stick coated pressure cookers in both handi and kadai shapes; 50 new product variants

FY07 Introduced Prestige Nakshatra, a range of inner-lid pressure cookers; 89 SKUs across seven categories

FY08 86 new SKUs, five new product categories

FY09 New range of induction cooktops

FY10 Introduced a host of new product categories including the Apple range of inner-lid pressure cookers, microwave pressure cookers, range of induction cook tops and induction compatible cookware range

FY11 67 new SKUs and product variants for the appliance segment

FY12 60 new SKUs covering pressure cookers, induction cook tops, mixer grinders, rice cookers, gas stoves and other small electric appliances

FY13 110 new SKUs across pressure cookers, induction cook tops, mixer grinders, rice cookers, gas stoves and other small electrical appliance segments

FY14 ~70 new SKUs

FY15 Plans to introduce ~100 SKUs, and a range of products in the water purifier and kitchen storeware segments


TTK Prestige

18 March 2015 12

Exhibit 19: Key innovations at TTKPT


International alliances to drive premiumization To drive future growth, TTKPT is diversifying its portfolio by establishing alliances with international brands in segments like tableware, storage management and water filters. It has entered into business agreements with major international kitchenware manufacturers, including World Kitchen, Meyer Corp, and Vestergaard Frandsen. However, after the partnership with World Kitchen failed to garner expected financial results in FY13, TTKPT decided to restrict the distribution alliance to the storeware range under the Snapware brand. We expect water filters to be a key product launch, with meaningful revenue contribution from FY17.

Exhibit 20: Alliances with global brands

Partner Brands/products Comment

Vestergaard Frandsen

LifeStraw water filters The water filter market in India is largely untapped (~5% penetration) and, thus, offers immense potential. TTK is licensing the water filters, manufacturing them in its Gujarat plant and will be marketing the products (co-brand)

Schott AG Prestige Premia range of glass top gas stoves

The high-end gas stoves range is aimed at ‘premiumizing’ its brand and for catering to the high-end segment of the market

Meyer Corp

A range of cookers and cookware products under known brands such as Anolon, Circulon, Faberware and Bonjour

The products are aimed at the premium segment; TTK has the distribution rights for these products


Expect water purifier to be a strong product for TTKPT The water purifier market in India is underpenetrated (~5% penetration), which presents immense growth potential. The industry is expected to grow rapidly in the next few years, driven by rise in health awareness and increase in affordability. TTKPT has entered into an alliance with Vestergaard Frandsen, a Switzerland-based manufacturer of non-electric water purifiers, to enter the water purifier market in India as a natural extension of its product line. TTKPT plans to introduce an entry-level water purifier at ~INR2,000 to penetrate this segment. The share of non-electric water purifiers currently stands at ~20%, and this would be the core target segment for TTKPT. We expect meaningful revenue contribution from FY17.

TTK Prestige

18 March 2015 13

Strong distribution network Reaching last mile via vast distribution network TTKPT sells its products through multiple distribution channels, supported by a large network of dealers. This has enabled TTKPT to reach new markets and more consumers. It markets its products through authorized direct dealers, authorized redistributors, large format stores (like Big Bazar, Star Bazar), institutions (large corporate houses that place bulk orders for gifting), multi-level marketing chains, and franchise retail outlets – Prestige Smart Kitchen. This also provides it higher bargaining power and eliminates the risk of dependence on any one channel. Increasing urbanization and rising incomes would spur consumer demand from tier-II and tier-III markets, which can only be met by an extensive distribution network and strong brand presence. With pan-India presence and a vast distribution network of ~23,000 direct dealers, TTKPT is well positioned to tap these opportunities. Exhibit 21: TTKPT has strong presence across distribution channels

Traditional Trade Modern Trade Own Retail Institutions

Authorized Direct Dealers Hypermarkets Prestige Smart Kitchens CSD

Authorized Re-distributors Super markets BPCL

Sub Dealers Shop in Shop HPCL

Corporate and Govt.


Exhibit 22: Revenue mix from various channels


Emerged from a South India player to a pan India player TTKPT was traditionally a South India focused player, deriving most of its revenue from this market. To expand its addressable market, TTKPT has leveraged its brand and expanded distribution network in the last few years to penetrate the western, northern and eastern regions. It derives 45% of its revenue from non-South markets. Prestige Smart Kitchen – marketing tool turned into distribution model TTKPT launched its exclusive retail outlets, Prestige Smart Kitchen (PSK) in early 2003 as part of its marketing strategy. Its foray into non-traditional products such as nonstick cookware, gas stoves and kitchen electrical appliances initially failed to generate interest among dealers, who were apprehensive about the acceptance of TTKPT’s new products in the market, given the presence of other brands. To market

Traditional Trade, 63%

Modern Retail, 15%

PSKs, 15%

Institutions, 7%

#3

TTK Prestige

18 March 2015 14

these products and reach out to consumers, it opened retail stores under the franchisee model. These stores met with a high degree of success and attracted a large number of consumers, which eventually encouraged dealers to ask for TTKPT’s new products. What began as a marketing tool has now evolved into a distribution model, with 561 Prestige Smart Kitchen outlets contributing 15% of its sales. Asset-light model eliminates risk Prestige Smart Kitchen (PSK) stores follow an asset light model, with the franchisee bearing all establishment and running costs, limiting TTKPT’s investment requirements. Further, store expansions bear negligible risk, as the stores are under the franchisee model - product transfers to these outlets are treated as a normal sale to a dealer and the company has no liability, thereafter. Additionally, PSK stores act as a useful marketing tool, helping to increase brand visibility. Benefits of the PSK model:- n PSK showcases the entire Prestige product range from pressure cookers to

induction cook-tops and electrical appliances whereas a normal dealer would have space constraint and investment issues in stocking up the whole range. At times, he is also limited by the profile of customers he caters to. Consequently, PSKs help push the brand as a ‘total kitchen solutions provider’ for the entire customer base.

n The retail presence helps the company reach customers directly thus limiting the distribution channel costs, enhancing margins further and providing better bargaining power for itself. It also eliminates the risk of dependency on any one particular channel.

n There are several geographies wherein households have the ability and willingness to buy branded kitchenware, but do not have brand awareness and access to distribution network of such products. The network of PSKs penetrates such geographies and enables Prestige to grab a bigger share of the pie when consumers shift from unorganized to organized buying of kitchenware.

Expanding retail network to support new product launches ~70% of PSK stores are in South India. TTKPT plans to take the total number of outlets under PSK to 800 over the next three years. The increasing number of PSK stores provides a robust platform for launching new product categories (such as water purifiers) and helps in gaining brand visibility. Exhibit 23: Strong expansion in Prestige Smart Kitchen stores


80180 173 196 228

279356

433536 580

650725


Prestige Smart Kitchens (nos)

TTK Prestige

18 March 2015 15

Exhibit 24: Prestige Smart Kitchen store mix (%)


Superior supply chain management Our channel checks suggest that TTKPT’s supply chain management is superior compared with Hawkins. Dealers in North India suggest that proximity to the wholesale distributor and product availability at their stores is one of the biggest factors driving penetration of TTKPT’s products in a market previously dominated by Hawkins. TTKPT follows a hub-and-spoke supply chain model, with 23 warehouses across India and a large number of wholesale distributors across cities to cater to the demand for stock from all three distribution channels – retail supermarkets, traditional dealers, and franchisee shops. Creating replacement demand through exchange schemes TTKPT derives ~20% of its sales through exchange schemes and other promotions. This has led to creation of substantial replacement demand for its pressure cookers, nonstick cookware and gas stoves, which otherwise have high durability with product life of 8-9 years. The kitchen electrical appliances have a much shorter life of 2-3 years, fostering a natural replacement market. Consumers are always attracted to branded products being sold at discounted prices. Besides, higher income levels have also led consumers to shift to products with better features and greater brand value. TTK runs the ‘Exchange Anything for Anything’ scheme where consumers can bring in any old product and exchange it for any new Prestige product of their choice, which has been a big success. Strong brand positioning coupled with such schemes will enable TTKPT to achieve higher sales.

South, 69%

Non-South, 31%

TTK Prestige

18 March 2015 16

Significantly outperformed competition Has grown to 3x the size of Hawkins over the last decade

n Ten years ago, TTKPT and Hawkins were of similar size. TTKPT has since grown to be 3x the size of Hawkins in terms of revenue and PAT.

n We believe TTKPT’s superior strategy of aggressive product launches and distribution expansion has driven its outperformance over Hawkins.

TTKPT’s aggressive strategy has driven outperformance against competition While TTKPT and Hawkins were similarly sized businesses ten years ago, TTKPT has consistently outperformed Hawkins on all parameters. The net result is that TTKPT’s revenue and PAT are 3x those of Hawkins.

Exhibit 25: Snapshot of relative performance of TTKPT and Hawkins

10 Year Period TTK Prestige Hawkins Difference

Revenue growth 25% 16% 9%

EBITDA growth 30% 26% 4%

PAT growth 65% 47% 17%

Market Cap growth 72% 62% 11%

5 Year Period TTK Prestige Hawkins Difference

Revenue growth 26% 13% 13%

EBITDA growth 35% 14% 21%

PAT growth 38% 15% 23%

Market Cap growth 103% 65% 38%


Exhibit 26: TTKPT’s revenues have expanded to 3x Hawkins


Exhibit 27: TTKPT’s PAT has expanded to 3x that of Hawkins


1.3 1.2 1.3 1.0 1.4 1.8 2.2 2.8 3.3 4.0 5.1

7.6

11.0 13.6 12.9

1.2 1.1 1.0 1.0 1.1 1.2 1.4 1.7 2.0 2.4 2.9 3.3 3.7 4.2 4.5

1.1 1.1 1.3 1.1 1.4 1.6 1.6 1.6 1.6 1.7 1.8

2.3

3.0 3.2 2.8

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

TTKP revenues (INR b) Hawkins revenues (INR b) TTK/Hawkins revenues (x)

0.0 0.0 0.0

(0.1)

0.0 0.0 0.1 0.1 0.2 0.2 0.5

0.8

1.1 1.3 1.1

0.0 0.0

(0.0) (0.1)

0.0 0.0 0.0 0.1 0.1 0.2 0.4 0.3 0.3 0.3 0.4 1.0 0.8

(0.3)

1.7 1.0

1.3 1.8

1.5 1.8

1.2 1.4

2.6

3.8 3.9

2.9

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

TTKP PAT (INR b) Hawkins PAT (INR b) TTK/Hawkins revenues (x)

TTK Prestige

18 March 2015 17

Superior multi-product / multi-geography strategy-driven outperformance We believe TTKPT’s superior strategy of aggressive product launches and distribution is responsible for driving its outperformance over Hawkins. While TTKPT expanded its presence from outer-lid pressure cookers to inner-lid pressure cookers to tap the North and West India markets, Hawkins continued to focus on just the inner-lid market for pressure cookers.

Similarly, as TTKPT expanded into high growth appliances categories, Hawkins chose to ignore that market. Further, TTKPT identified the right industry trends like those relating to induction cooktops and carved a portfolio of induction-based cooktops and cookware, making it the market leader in the newly emerged induction market category. Also, while TTKPT expanded to North and West India, eating into Hawkins’ stronghold, Hawkins chose to ignore TTKPT’s stronghold – the South market. While TTKPT has emerged as a pan-India player, with even revenues from South and non-South markets, Hawkins remains a North/West India player, with minimal revenue from South India. Further, unlike Hawkins, TTKPT has invested aggressively in marketing and supplemented its distribution with exclusive brand outlets (PSK stores). TTKPT has thus been continuously gaining market share over Hawkins.

Exhibit 28: While Hawkins continues to be focused on cookers and cookware…


Exhibit 29: …TTKPT has developed a strong and exhaustive product portfolio


TTK Prestige

18 March 2015 18

Capacity in place for next growth phase Commenced INR3b capex over FY11-14, with higher utilization potential

n TTKPT has incurred a capex of INR3b over FY11-14, expanding its net block by 8x from INR419m to INR3,396m.

n It has ample room to improve capacity utilization (58% in pressure cookers and 42% in nonstick cookware). The management plans to ramp up utilization through exports.

n As capacity utilization improves, we expect better fixed cost absorption for the new plant, driving higher margins for TTKPT.

Massive capacity expansion; sets right stage for growth TTKPT posted strong 26% revenue CAGR over FY09-14, led by new product introductions in nonstick cookware and appliances. Most of the new introductions were through outsourcing to Chinese and local vendors. In FY12, over 50% of sales came from outsourced products and imports. This exposed TTKPT to currency fluctuations, difficult and long working capital cycles, and lower margins in some cases. To overcome these concerns, TTKPT has expanded its capacities across segments. It has incurred a capex of INR3b over FY11-14, expanding its net block by 8x from INR419m to INR3,396m. Pressure cooker capacity was increased by 2x from 4.8m pieces to 9.6m pieces, while nonstick cookware capacity was increased by 6x from 2m units to 12m units. TTKPT has expanded its manufacturing capacities at its Coimbatore (Tamil Nadu) and Roorkee (Uttarakhand) plants, while also commissioning its greenfield capacities in Gujarat. Exhibit 30: Net fixed assets have grown ~8x over FY11-14


Exhibit 31: Capacity expansions largely in pressure cookers and nonstick cookware

Product segment Manufacturing capacity

Cookware Capacity has been increased to 12m pieces/annum from 2m pieces/annum; to be manufactured indigenously

Pressure cooker Manufacturing capacity expanded to 9.6m pieces per annum from 4.8m pieces; to be manufactured in-house

Induction-based products

Mix of in-house manufacturing and imports. Current capacity stands at 1m pieces per annum

Others Water purifier production plant in Gujarat


419

1,507 1,681

3,396 3,455 3,489 3,501

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Net Fixed Assets (INR m)

TTK Prestige

18 March 2015 19

Higher manufactured proportion to drive utilization higher With expansion and consequent higher utilization, revenue from own manufacturing improved from 48% in FY13 to 57% in FY14. However, there remains ample room to improve capacity utilization (which stood at 58% in pressure cookers and 42% in nonstick cookware in FY14). The management plans to improve utilization by substitution of outsourcing with own manufacturing for domestic business and developing an export business. Successfully tapping of export markets can step up utilization significantly TTKPT is in advanced talks with European OEMs to manufacture products for them under a white-labeling arrangement at margins similar to domestic margins. Our interaction with management suggests that TTKPT is at an advanced stage of negotiation with foreign OEMs and has been working on trial orders for them. Thus, we expect export segment to meaningfully contribute from FY16.

Exhibit 32: Ample room to improve utilization

Pieces (m) FY11 FY14 Expansion (x) FY14 Sales Utilization (%)

Pressure Cookers 4.8 9.6 2.0 5.5 58%

Non Stick Cookware 2.0 12.0 6.0 5.0 42%


Exhibit 33: Manufactured proportion vs outsourcing proportion

Manufactured proportion (%) FY13 FY14 Revenue

proportion (%) Capacity

utilization (%)

Pressure Cookers 100% 100% 38% 58%

Non Stick Cookware 33% 74% 17% 42%

Gas Stove 2% 0% 13% NA

Kitchen Electrical Appliances 16% 23% 30% NA

Others 0% 0% 3% NA

Grand Total 48% 57% 100% NA


Will continue to follow outsourcing model for appliances TTKPT sources its gas stoves and kitchen electrical appliances from third parties and would continue to do so to maintain its focus on manufacturing of pressure cookers and cookware. While gas stoves are being sourced from dedicated small and medium scale enterprises in North India under TTKPT’s strict supervision, 60% of its kitchen electrical appliances requirement is being sourced from China (20% cheaper than in-house manufacturing). This strategy would enable TTKPT to grow faster without investing too much in building capacities.

Improvement in capacity utilization to drive margins higher With expansion in capacity, TTKPT’s dependence on imports/outsourced manufacturing, particularly for pressure cookers and cookware, is likely to reduce. This should boost margins for those product categories and insulate TTKPT from foreign exchange volatility. As the capacities are currently underutilized (58% capacity utilization in pressure cookers and 42% in nonstick cookware) there are significant under-absorbed fixed costs, dragging margins lower for these segments. As capacity utilization improves, we expect margins for these segments to expand, thus improving overall EBITDA margins for the company.

TTK Prestige

18 March 2015 20

E-commerce impact / induction de-growth behind Expect growth to recover

n Predatory pricing by e-commerce players had caused channel conflicts for TTKPT, leading to inventory correction by traditional retailers. To correct this, TTKPT plans to directly tie up with e-commerce players and to maintain price discipline on their sites.

n Growth in the induction range was impacted in the last two years due to change in government policies on gas cylinders and power supply issues in South India. With significant de-growth in induction, we believe the base is now favorable for growth.

Penetration of e-commerce impacted traditional retail business With higher e-commerce penetration in India, and given the predatory trade practices followed by some leading e-commerce players, sales for TTKPT’s traditional retail channel have been impacted. The traditional retail channel contributes ~65% of TTKPT’s revenue. Lower prices on the e-commerce channel set a deflationary trend for distributor inventories. This led distributors to cut back on channel inventories from the normal practice of holding two months of inventory to holding as low as 15 days of inventory. This inventory correction in TTKPT’s largest channel has impacted sales growth for the company over the last one year. Though TTKPT does not sell directly to e-commerce firms, e-commerce firms procure products from TTKPT’s distributors, by-passing the company.

Management plans to directly tie up with e-commerce companies In our interactions, the management has indicated that a number of e-commerce firms have approached TTKPT for direct tie-ups to sell its products on their platforms. TTKPT intends to manage its own page on e-commerce platforms and ensure no predatory pricing. It is likely to take another six months to one year to make complete transition to this new arrangement with e-commerce firms, post which it can avoid channel conflicts faced in the past.

Sales of induction-based products impacted by higher cap on LPG cylinders TTKPT introduced induction-based appliances such as cooktops, cookers and cookware in FY09. The contribution of this product segment to overall revenue jumped to 42% in FY13 from 17% in FY09, with induction cooktops accounting for the largest share (40-45%) in the segment. However, the sale of induction cooktops and other bundled products (cookers and cookware) declined in FY14 owing to: (1) severe power shortages in Tamil Nadu and Kerala, (2) relaxation of the cap on subsidized LPG cylinders to twelve from six previously, and (3) excess channel inventory due to a number of players entering the induction-based appliances market. With significant de-growth over last two years, contribution from induction-based products has declined to ~20% of revenue as against the peak of 42% in FY13. However, TTKPT has outperformed industry peers and gained market share in this category. We believe the base is now highly favorable, and any improvement in consumer sentiment will propel growth in FY16.

Power shortage had impacted growth in South India After acute shortages in FY13 and FY14, power supply is likely to improve in South India after the connection of the southern electricity grids with the northern electricity grids. Power shortage impacted TTKPT on both the demand and supply sides. It disrupted manufacturing in TTKPT’s facilities in Hosur and affected the sale of induction-based products. With power supply in southern states showing signs of improvement, we expect demand for induction-based products to pick up.

TTK Prestige

18 March 2015 21

Earnings to post 41% CAGR over FY15-17 Drivers: Revival in discretionary demand, higher operating leverage

n We expect revenue to grow at a CAGR of 23% over FY15-17, led by 31% CAGR in nonstick cookware business, 23% CAGR in pressure cooker business, and 17% CAGR in appliances business.

n With operating leverage, we expect EBITDA to post 35% CAGR and PAT to post 41% CAGR over FY15-17. Led by better asset utilization, we expect return ratios to improve. For FY17, we estimate RoCE at 34% and RoE at 24%.

n We expect operating cash flow to remain strong. Given minimal reinvestment needs, annual free cash flow should improve to INR1.7b over FY15-17.

n Despite strong payout (28%), we expect cash on books to rise from INR0.7b in FY15 to INR2.6b in FY17, approximating 7% of the current market capitalization.

Expect revenue CAGR of 23% over FY15-17 We expect revenue to grow at a CAGR of 23% over FY15-17, led by 31% CAGR in nonstick cookware business, 23% CAGR in pressure cooker business, and 17% CAGR in appliances business. Revenue mix within segments is likely to be stable.

Exhibit 34: Revenue to post 23% CAGR over FY15-17


Exhibit 35: Revenue mix to remain largely stable


EBITDA to post 35% CAGR over FY15-17 We expect EBITDA to post 35% CAGR over FY15-17. Margins should expand 240bp to 14%, driven by higher contribution from in-house manufacturing and operating leverage benefits due to higher sales growth.

11,03413,585 12,938 13,743

16,863

20,875


Revenues (INR m)

59 56 55 53 47 41 36 37 37 38 38 38

15 15 16 15 17 20 20 18 17 19 21 22

10 11 10 10 12 10 10 9 13 13 12 12

9 13 14 17 20 25 31 33 30 26 26 26


Pressure Cookers & Pans NonStick Cookware Gas Stoves Kitchen Electrical Appliances

TTK Prestige

18 March 2015 22

Exhibit 36: EBITDA to clock 35% CAGR over FY15-17


PAT to post 41% CAGR over FY15-17 We expect PAT to grow at a CAGR of 41% over FY15-17 from INR1b to INR1.9b.

Exhibit 37: PAT (INR m)

Source: MOSL Working capital cycle to improve We expect working capital days to improve from 62 days to 47 days, led by lower inventory days, which should decline from 75 days to 65 days.

Exhibit 38: Cash conversion cycle (days)

Source: MOSL

Operating cash flows to remain strong; free cash flow robust We expect operating cash flow to remain strong. Given minimal reinvestment needs, annual free cash flow should improve to INR1.7b over FY15-17. Capex during the period would only be minimal at INR250m per annum.

1,7202,037

1,602 1,5942,142

2,923

15.6% 15.0%

12.4% 11.6%12.7%

14.0%


EBITDA (INR m) Margins (%)

1,1261,331

1,067 980

1,376

1,952


PAT (INR m)

35 38 42 42 40 40

58 63 75 75 70 65

50 19 14 16 15 15

66

59 57 60 60 60

4414 10 10 11 12

33

48

64 6254 47


Receivables (days) Inventory (days) Loans and Advances (Days)

Payables (days) Provisions (Days) Working Capital Days

TTK Prestige

18 March 2015 23

Exhibit 39: Operating cash flow to remain strong


Exhibit 40: Robust free cash generation


Return ratios to improve Led by better asset utilization, we expect return ratios to improve. For FY17, we estimate RoCE at 34% and RoE at 24%.

Exhibit 41: RoCE (%)


Exhibit 42: RoE (%)


Dividend payout at 28%; strong cash accretion on books We expect TTKPT to maintain its strong dividend track record, with ~28% payout. Despite strong payout, we expect cash on books to rise from INR0.7b in FY15 to INR2.6b in FY17, approximating 7% of the current market capitalization.

Exhibit 43: Dividend payout (%)


Exhibit 44: Cash on books (%)


637

1,005 9121,143

1,473

1,976


Operating Cash Flow (INR m)

-911

49 145

9991,192

1,686


Free Cash Flow (INR m)

59

47

2723

2934


RoCE (%) 47

39

2216

2024


RoE (%)

2117

2428 28 28


Dividend Payout (%)

223 326 296699

1,480

2,620

1% 1% 1%

2%

4%

7%


Cash on books (INR m) % of Mcap

TTK Prestige

18 March 2015 24

Initiating coverage with a Buy rating Target price of INR5,000 implies 37% upside

n We believe the de-growth phase is behind for TTKPT, with discretionary spends revival and ramp-up of export opportunity, TTK will post 23% Revenue CAGR over FY15-17.

n We expect higher capacity utilization to drive significant operating leverage for TTKPT with margins expanding 240bp over FY15-17, driving 41% PAT CAGR.

n The stock trades at 30.8x and 21.7x FY16/17 EPS. We initiate coverage with a Buy rating valuing the stock at 30x FY17 EPS, with PT of INR5,000.

Exhibit 45: P/E (x)


Exhibit 46: P/B (x)


Exhibit 47: Assumptions Assumptions FY12 FY13 FY14 FY15E FY16E FY17E Pressure Cookers & Pans 4,132 5,106 4,940 5,343 6,563 8,063 NonStick Cookware 2,247 2,449 2,270 2,696 3,519 4,594 Gas Stoves 1,108 1,279 1,669 1,802 2,073 2,487 Kitchen Electrical Appliances 3,494 4,490 3,907 3,633 4,416 5,419 Total Revenues (INR m) 11,034 13,585 12,938 13,743 16,863 20,875 Pressure Cookers & Pans 30% 24% -3% 8% 23% 23% NonStick Cookware 46% 9% -7% 19% 31% 31% Gas Stoves 37% 15% 30% 8% 15% 20% Kitchen Electrical Appliances 81% 28% -13% -7% 22% 23% Total Revenue Growth (%) 45% 23% -5% 6% 23% 24% Pressure Cookers & Pans 37% 38% 38% 39% 39% 39% NonStick Cookware 20% 18% 18% 20% 21% 22% Gas Stoves 10% 9% 13% 13% 12% 12% Kitchen Electrical Appliances 32% 33% 30% 26% 26% 26% Total Revenue Mix (%) 100% 100% 100% 100% 100% 100%


26.4

28.3

0

15

30

45

60

Mar

-04

May

-05

Jun-

06

Jul-0

7

Aug-

08

Sep-

09

Oct

-10

Nov

-11

Jan-

13

Feb-

14

Mar

-15

P/E (x) 5 Yrs Avg(x)

4.7

6.9

0

3

6

9

12

Mar

-04

May

-05

Jun-

06

Jul-0

7

Aug-

08

Sep-

09

Oct

-10

Nov

-11

Jan-

13

Feb-

14

Mar

-15

P/B (x) 5 Yrs Avg(x)

TTK Prestige

18 March 2015 25

Risks and concerns Threat from predatory trade practices by e-commerce firms: TTKPT has been impacted by predatory trade practices adopted by e-commerce firms which has resulted in inventory de-stocking by its traditional retailing channels. Management plans to directly tie-up with e-commerce firms to ensure parity in online and offline prices and thus avoid channel conflicts. However, any delay in forging these agreements with e-commerce firms can impact near term growth for TTKPT. Volatility in raw material prices: TTKPT’s primary raw materials are aluminum and steel – commodities whose prices are linked to global commodity prices. Although the company has been able to pass on the increase in raw material prices to consumers in the past owing to a strong brand, any failure to do so in the future can adversely impact operating margins. Foreign exchange movement: TTKPT imports raw materials and traded products which exposes it to foreign exchange volatility risk. Sharp INR depreciation coupled with the company’s inability to pass on any increase in the cost of imports to consumers may negatively impact margins in the near term.

TTK Prestige

18 March 2015 26

Management Mr TT Jagannathan, Chairman Mr Jagannathan serves as Chairman of TTK Prestige. He is a gold medalist from IIT Chennai and Masters in Operations Research from Cornell University, US. He has been on the board for more than 35 years now. He has two sons who are also involved in managing group companies. Mr TT Raghunathan, Vice Chairman Mr Raghunathan serves as Executive Chairman of TTK Prestige. He is a Commerce graduate. He has been on the board since 1995, has vast industrial experience and has been actively involved in the management of various group companies. Mr S Ravichandran, Managing Director Mr Ravichandran serves as Managing Director and Executive Director of TTK Prestige and has been on the board for over 10 years. He has degree in Mechanical Engineering from IIT Chennai and is an IIM Ahmedabad graduate. Mr Ajay Thakore, Non-Executive Director Mr Thakore serves as Non-Executive Independent Director of TTK Prestige. He is a Chartered Accountant, and practices as an Advocate and Tax Consultant. He has been on the board since 1974. Mr R Srinivasan, Non-Executive Independent Director Mr Srinivasan is BE (Hons) by qualification. He has vast industrial experience and is a Management Consultant. He has been on the board of TTK Prestige since 2000. He is also on the boards of Cholamandalam MS General Insurance, Kirloskar Oil Engines, and Sundaram Fasteners. Mr K Shankaran, Director and Whole-Time Secretary Mr Shankaran is a Cost & Management Accountant and Company Secretary, and has been Whole-Time Secretary of the company since 1990. He was inducted into the board in 1993. He is also on the boards of TTK Healthcare, Prestige Housewares, TTK Healthcare TPA, TTK Services, and Manttra Inc, US.

TTK Prestige

18 March 2015 27

Industry overview Demographics changes, rising incomes to create demand for appliances The home appliances market in India will see a significant growth due to lower penetration, increasing incomes, and growing urbanization. Also the need for comfort and convenience in urban households as both partners work and thus the perception of appliances will change from luxury to necessity which will lead to a rapid growth for the home appliance market. Another major growth driver of appliance market will be the growing middle class in India. According to a McKinsey Global Institute (MGI) 2010 report, India’s fast growing cities will drive a near fourfold increase in the country’s per capita income between 2008 and 2030. Also, the number of middle class households (earning between INR2 lakh and INR10 lakh a year) will increase more than fourfold nationwide from 32 million to 147 million in 2030. With the rising disposable income (per capita disposable income of the urban segment is expected to grow at a CAGR of 6.4% between 2008 and 2030), consumer’s discretionary expenditure is also likely to increase significantly. Going forward, rising disposable income would provide more room for expenditure in discretionary items. According to PwC-Ficci, the discretionary spend as a proportion of total spend is expected to improve by ~10% by the end of 2019-20. We believe the demand for appliances will be driven by rising disposable incomes. Exhibit 48: Consuming class expected to expand from 50% currently to 85% over FY10-30


64%50%

26% 15%

31%34%

40%32%

4%12%

25%

29%

1% 2% 6%17%

0% 2% 3% 7%

2000 2010 2020 2030

Deprived <0.9 Lakhs Aspirers 0.9-2 Lakhs Seekers 2-5 Lakhs

Strivers 5-10 Lakhs Globals > 10 Lakhs

TTK Prestige

18 March 2015 28

Small appliances set to grow at 15-18% annually ASSOCHAM expects Indian consumer durable industry to grow to Rs 520bn (USD 8.40bn) by CY2015. The overall small appliances market is estimated at USD 1.2 billion, growing 15-18% a year. The premium segment is expected to grow at 30% p.a. Penetration levels for consumer goods across categories remains low.

Exhibit 49: Consumer goods penetration levels (%)

Source: Industry, MOSL

Exhibit 50: Consumer goods penetration levels (%)


Key factors which will lead to double digit growth in small appliances market include:

n Rise in number of nuclear families with reduction in average household size (Avg. household size has reduced from 5.6 in 1991 to 4.9 currently).

n Rise in per capita income of middle class Indian households will lead to consumer upgrading to branded products.

n Higher growth (25-30% pa) in under penetrated rural market will help drive overall growth momentum.

n Increasing affordability and improving educational level will lead to reducing replacement cycle to 2-3 years for small appliances.

Exhibit 51: Small Industry market size (INR b)


8980

5646

34

12

Fans

Pres

sure

Co

oker

s TV

Refr

iger

ator

s

2-W

heel

ers

Cars

Urban48

38

19 198

3

Fans

Pres

sure

Co

oker

s TV

2-W

heel

ers

Refr

iger

ator

s

Cars

Rural

7486

98113

130

CY13 CY14 CY15 CY16 CY17

Small appliances market size (INRb)

TTK Prestige

18 March 2015 29

Kitchen and Appliances industry The total kitchen and appliances market is ~INR90b. TTK’s market share stands at 15%, while other prominent players include Bajaj, Philips, Hawkins, etc. Exhibit 52: TTKPT caters to an opportunity size of INR90b


Pressure Cooker industry Over the years, the Indian kitchen appliances industry has experienced a rapid shift in preference from unorganized to organized and branded players. Rising disposable income, increasing urbanization and a shift from traditional joint families to nuclear families have led to a strong industry growth.

n Market size of the domestic cooker industry stands at INR13b in value terms. n In the overall market, organized segment accounts for 50%. Key players in

organized market include TTK, Hawkins, United, Pigeon, Butterfly, etc. n TTK enjoys a leadership position in Southern India, where it has 80% market

share. It has also notched up > 15% market share in the Northern market. n The penetration of cookers in urban / rural India stands at 85% and 25% resp. n Outer-lid cookers dominate market share in Southern and Western India, even

as inner-lid cookers are preferred in Northern and Eastern India. n In terms of pricing, the unorganized segment sells outer-lid cooker 20% cheaper

to organized players and inner-lid at 50%. Cookware and appliances industry n The organized cookware industry has a market size of INR7b in value terms. n The market is split equally between organized and unorganized players. Here,

TTK has a 30% market share in the organized space, with Hawkins enjoying 10%. n TTK also enjoys a leadership position in Southern India, with 80% market share,

besides its 30% market share in Northern India. The market is fragmented with other players like Nirlep, Butterfly, Pigeon etc.

n The penetration of non-stick cookware in urban India stands at ~55% and in rural areas at ~5%.

n The unorganized market sells products 20% cheaper than organized players.

Pressure cookers, 13.2

Non stick cookware, 7.2

Mixer grinders, 20.0

LPG gas Stoves, 18.0

Induction Cook tops, 10.0

Rice Cookers, 4.0

Chimneys, 5.8

Wet Grinders, 5.0

Small Appliances, 7.0

Market size (INR b)

TTK Prestige

18 March 2015 30

Company overview

TTK is the flagship company of the TT Krishnamachari Group of companies which has a presence in businesses like consumer durables, pharmaceuticals, healthcare and biomedical devices. TTK Prestige Ltd was set up in 1955 as a private limited company before it went public in 2000. The company through its brand ‘Prestige’ is among the leading brands in the kitchen appliances space in India, especially in pressure cookers and non-stick cookwares. It has four manufacturing facilities at Hosur, Coimbatore (in Tamil Nadu) Roorkee (in Uttarakhand) and Gujarat.

Exhibit 53: TTK group

Exhibit 54: Diversified group structure


Started in 1928 as an indenting agency v Founded by Mr. TT Krishnamachari v Pioneered organized distribution v Health care, Foods, Personal care

products, Writing instruments, Ethical products

v Cadbury’s, MaxFactor, Kiwi, Kraft, Sunlight, Lifebuoy, Lux, Ponds, Brylcreem, Kellogg's, Ovaltine, Horlicks, Mcleans, Sheaffer’s, Waterman’s & many more

Manufacturing commenced in 1950 v Pioneered several categories in India v Pressure cookers, Gripe water, Maps,

Condoms, ball pens, Toys and Heart Valves.

Today a Rs22 Billion group v 30 product categories and services v 16 manufacturing units v 12000 employees •Exports to every

continent

TTK Prestige

TTK Healthcare

TTK Protective Devices

TTK Services private

Cigna TTK Health

Insurance Company

Consumer durables -Listed

Pharmaceuticals, Medical devices , Consumer products and Foods -Listed

Condoms

Non-Resident services and KPO

Health Insurance JV with Cigna of USA

TTK Prestige

18 March 2015 31

TTK Prestige commenced operations as a traditional pressure cooker manufacturer, selling outer-lid aluminum pressure cookers, manufactured at facilities being only in Bangalore and Hosur. It has since evolved into a ‘Total Kitchen Solutions’ company offering a wide range of products spanning pressure cookers, non-stick cookware, kitchen hoods (chimneys), hobs, gas stoves and several other electrical appliances. Recently, TTK also forayed into modular kitchens wherein the company offers kitchen designs and fittings based on customer requirements. Company has been at the forefront by introducing several innovations like Gasket Release System (GRS), Gasket Offset Device (GOD) and Double Locking System, all firsts in India. Its strategy of introducing 100 new models across product lines every year has helped achieve volume growth and garner higher market share. TTK has been awarded the “Super Brand” validated by consumers. Pressure cookers continue to be the major contributor to revenue, with 41% of sales coming from this segment and 20% of the revenue from non-stick cookware, 25% from kitchen electric appliances, 10% from gas stoves and the balance from other products. Exhibit 55: Segment wise revenue mix


Others , 3

Kitchen Electrical Appliances , 31

Gas Stoves, 10Non Stick Cookware, 20

Pressure Cookers & Pans, 36

TTK Prestige

18 March 2015 32

Exhibit 56: Key milestones

Year Key Milestones

1955 Incorporated as a private limited company

1959 Commenced manufacturing of pressure cookers with technical collaboration from Prestige Group (UK)

1984 Launched Prestige pressure pan

1990 Launched ready-to-eat snacks, Fryums, in India

1994 Came out with an IPO

1994 Changed name from TT Ltd to TTK Prestige Ltd

1995 Launched its products under the brand name Manttra in the US market

1998 Entered the UK and Australian markets

2000 Launched Prestige omega non-stick cookware

2001 Launched a new range of vacuum flasks with imported shells

2003 Recast its debt portfolio by converting the majority of its borrowing into ECBs and FCNRB loans aggregating to USD9.5m

2004 Inaugurated an exclusive TTK Prestige showroom in Vijayawada

2005 Obtained licence for Prestige brand for the use in the US; launched Prestige Nakshatra (inner lid), pressure Handi, pressure kadai, duplex gas tables

2008 Introduced a new range of induction cook tops

2009 Launched Prestige Apple range of inner-lid cookers, Prestige Micro Chef microwave cookers, inducted compatible base cookware

2010 Voted as India’s most trusted kitchen appliance brand by the Brand Equity survey of India’s most trusted brands 2010

2011 Envisaged capacity expansion of 3,000m

2012 Entered into business tie-ups with World Kitchen, Vastergaard Frandenson, Meyer and Schott AG

2013-14 Expanded the pressure cooker capacity from 4.8m units to 9.6m units and cookware capacity from 2m units to 12m units.


TTK Prestige

18 March 2015 33

Financials and valuations

Standalone - Income Statement (INR Million) Y/E March FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Gross Revenues 5,168 7,756 11,227 13,859 13,234 13,966 17,137 21,214

Less: Excise Duty 89 120 193 274 295 223 274 339

Net Sales 5,079 7,636 11,034 13,585 12,938 13,743 16,863 20,875

Change (%) 26.6 50.3 44.5 23.1 -4.8 6.2 22.7 23.8

Total Expenditure 4,306 6,419 9,314 11,548 11,336 12,149 14,721 17,953

% of Sales 84.8 84.1 84.4 85.0 87.6 88.4 87.3 86.0

EBITDA 774 1,217 1,720 2,037 1,602 1,594 2,142 2,923

Margin (%) 15.2 15.9 15.6 15.0 12.4 11.6 12.7 14.0

Depreciation 36 43 62 90 148 191 216 237

EBIT 738 1,174 1,658 1,947 1,455 1,403 1,926 2,685

Int. and Finance Charges 35 8 64 143 85 54 30 0

Other Income - Rec. 11 43 31 47 79 71 99 144

PBT bef. EO Exp. 714 1,210 1,625 1,852 1,448 1,420 1,995 2,829

EO Expense/(Income) -40 6 0 0 -70 0 0 0

PBT after EO Exp. 754 1,204 1,625 1,852 1,518 1,420 1,995 2,829

Current Tax 230 365 463 488 295 440 618 877

Deferred Tax 0 1 36 33 104 0 0 0

Tax Rate (%) 30.5 30.4 30.7 28.1 26.3 31.0 31.0 31.0

Reported PAT 524 838 1,126 1,331 1,118 980 1,376 1,952

PAT Adj for EO items 497 842 1,126 1,331 1,067 980 1,376 1,952

Standalone - Balance Sheet (INR Million) Y/E March FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Equity Share Capital 113 113 113 114 117 117 117 117

Total Reserves 1,128 1,801 2,738 3,841 5,737 6,444 7,438 8,845

Net Worth 1,242 1,915 2,851 3,955 5,853 6,560 7,555 8,961

Minority Interest 0 0 0 0 0 0 0 0

Deferred Liabilities 31 33 68 101 205 205 205 205

Total Loans 255 382 597 1,145 269 0 0 0

Capital Employed 1,528 2,329 3,516 5,201 6,327 6,765 7,760 9,167

Gross Block 835 892 2,029 2,262 4,125 4,375 4,625 4,875

Less: Accum. Deprn. 430 473 522 581 729 920 1,136 1,373

Net Fixed Assets 405 419 1,507 1,681 3,396 3,455 3,489 3,501

Capital WIP 235 495 794 1,401 243 137 169 209

Total Investments 4 226 4 0 90 90 90 90

Curr. Assets, Loans&Adv. 2,081 3,115 4,532 4,825 4,988 5,732 7,303 9,502

Inventory 613 1,050 1,749 2,355 2,668 2,824 3,234 3,717

Account Receivables 603 747 1,060 1,432 1,491 1,581 1,848 2,288

Cash and Bank Balance 440 535 223 326 296 699 1,480 2,620

Loans and Advances 426 782 1,499 712 533 628 741 876

Curr. Liability & Prov. 1,197 1,925 3,320 2,706 2,391 2,649 3,290 4,136

Account Payables 676 1,063 1,995 2,202 2,036 2,259 2,772 3,432

Provisions 522 862 1,325 504 354 390 518 704

Net Current Assets 884 1,189 1,212 2,119 2,598 3,083 4,012 5,366

Appl. of Funds 1,528 2,329 3,516 5,201 6,327 6,765 7,760 9,167

TTK Prestige

18 March 2015 34

Financials and valuations

Ratios

Y/E March FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Basic (INR) *

EPS 43.8 74.3 99.4 117.2 91.5 84.1 118.1 167.5

Cash EPS 47.0 78.0 104.9 125.1 104.2 100.5 136.6 187.9

BV/Share 109.6 168.9 251.6 348.3 502.2 562.9 648.2 768.9

DPS 10.0 12.5 17.5 17.5 20.6 20.6 28.8 41.1

Payout (%) 25.2 19.6 20.6 17.5 24.4 27.8 27.7 27.9

Valuation (x) *

P/E

39.8 43.3 30.8 21.7

Cash P/E

34.9 36.2 26.6 19.4

P/BV

7.2 6.5 5.6 4.7

EV/Sales

3.3 3.1 2.5 1.9

EV/EBITDA

26.8 26.6 19.4 13.8

Dividend Yield (%)

0.6 0.6 0.8 1.1

Return Ratios (%)

RoE 47.6 53.3 47.3 39.1 21.8 15.8 19.5 23.6

RoCE 54.8 64.2 58.8 46.7 27.3 23.2 28.7 34.3

Working Capital Ratios

Asset Turnover (x) 3.3 3.3 3.1 2.6 2.0 2.0 2.2 2.3

Inventory (Days) 44.0 50.2 57.9 63.3 75.3 75.0 70.0 65.0

Debtor (Days) 43 35 34 38 41 41 39 39

Leverage Ratio (x)

Current Ratio 1.7 1.6 1.4 1.8 2.1 2.2 2.2 2.3

Debt/Equity 0.2 0.2 0.2 0.3 0.0 0.0 0.0 0.0

Standalone - Cash Flow Statement (INR Million) Y/E March FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Net P/L Before Tax & EO Items 714 1,204 1,632 1,852 1,518 1,420 1,995 2,829

Depreciation 36 44 64 90 148 191 216 237

Interest & Finance Charges 11 8 56 147 85 54 30 0

Direct Taxes Paid 231 351 468 324 471 440 618 877

(Inc)/Dec in WC 97 -123 -647 -760 -367 -82 -149 -213

(inc)/dec in FA -40 -318 -1,523 -924 -705 -144 -281 -290

(Pur)/Sale of Investments 0 -222 222 0 -90 0 0 0

Others 11 37 24 32 62 0 0 0

CF from Investments -29 -502 -1,277 -891 -733 -144 -281 -290

Issue of Shares 0 0 0 0 1,053 0 0 0

(Inc)/Dec in Debt -179 0 575 365 -881 -269 0 0

Interest Paid -12 -13 -57 -148 -86 -54 -30 0

Dividend Paid -66 -132 -164 -197 -232 -273 -382 -545

Others 0 0 0 0 0 0 0 0

CF from Fin. Activity -257 -145 353 19 -147 -596 -412 -545

Inc/Dec of Cash 331 96 -312 100 -30 403 780 1,141

Add: Beginning Balance 109 440 535 223 326 296 699 1,480

Closing Balance 440 535 223 323 296 699 1,480 2,620

TTK Prestige

18 March 2015 35

N O T E S

TTK Prestige

18 March 2015 36

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